Thursday, December 31, 2009

Oil, natural gas markets brace for surprises

Crude's stimulus 'drugs' may wear out soon; supply's a drag for natural gas

Energy traders certainly have their work cut out for them when it comes to guessing the next direction for oil and natural gas as the year comes to an end.

After all, oil's made an impressive run, poised to end the year with a gain of more than 75% after closing out last year down 54% -- its biggest yearly loss since oil futures started trading in New York.

And while natural-gas prices are about to end the year will little fanfare, around 4% higher for the year, that's still much better than the 25% loss they posted in 2008. Prices have more than doubled from their lows around $2.50 per million British thermal units in early September.

'These quantitative easing and zero interest rate drugs feel pretty good right now. The problem is that we cannot stay on these drugs forever.'

Phil Flynn, PFG Best

"For both the crude and natural gas markets, I would say look to sell rallies of false optimism, but be careful of surprises in the weather," said Todd Hultman, president of DailyFutures.com.

That's easier said than done since "false optimism" will be everywhere.

Still, most analysts agree that the outlook for both commodities look promising in the long-term big picture, with the near-term path likely to be a difficult one to travel as major economies around the world begin to exit their economic stimulus packages and raise interest rates.

"This year was one where many oil traders had to forget everything they believed about supply and demand ... and instead were forced to focus on the intricacies of currency exchange rates and global macro economics and the relationships therein," said Phil Flynn, vice president at futures trading firm PFG Best.

Oil had started the year in the "grips of a deflationary death spiral," he said. Prices hit a high above $147 per barrel in 2008, only to sink to lows near $30 by February of this year.

"As the [Federal Reserve] pumped in more cash, the dollar lost value and commodities soared and oil more than doubled in price," said Flynn....MORE